# Implementation of Section 309(j) of the Communications Act Competitive Bidding

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## Record

- **Collection:** Federal Register
- **Document type:** Uncategorized Document
- **Published:** August 26, 1994

## Text

47 CFR Part 1

[PP Docket No. 93-253; FCC 94-215]

Implementation of Section 309(j) of the Communications Act--
Competitive Bidding

AGENCY: Federal Communications Commission.

ACTION: Final Rule; Petition for Reconsideration.

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SUMMARY: In this Second Memorandum Opinion and Order, the Commission
responds to petitions for reconsideration or clarification of the rules
and policies adopted in the Second Report and Order in this proceeding,
which sets forth general rules for the use of competitive bidding to
award licenses for use of the spectrum. The Commission makes minor
changes in the rules adopted in the Second Report and Order. This
action is taken to implement Section 309(j) of the Communications Act
of 1934, as amended. The rules will promote the development and rapid
deployment of new technologies, products, and services for the benefit
of the public, including those residing in rural areas. These rules
also will promote economic opportunity and competition, and disseminate
licenses among a wide variety of applicants, including small
businesses, rural telephone companies, and businesses owned by members
of minority groups and women. This action will result in recovery for
the public of a portion of the value of the public spectrum made
available for commercial use.

EFFECTIVE DATE: September 26, 1994.

FOR FURTHER INFORMATION CONTACT:
Jackie Chorney or Florence Setzer, Office of Plans and Policy, (202)
418-2030.

SUPPLEMENTARY INFORMATION: This Second Memorandum Opinion and Order in
PP Docket No. 93-253, adopted August 12, 1994, and released August 15,
1994, is available for inspection and copying during normal business
hours in the FCC Dockets Branch, room 230, 1919 M Street NW.,
Washington, DC. The complete text may be purchased from the
Commission's copy contractor, International Transcription Service,
Inc., 2100 M Street, NW., suite 140, Washington, DC 20037, telephone
(202) 857-3800.

Paperwork Reduction Act

In the Second Memorandum Opinion and Order in PP Docket No. 93-253,
the Commission adopted no new reporting or recordkeeping requirements.

In the Matter of Implementation of Section 309(j) of the
Communications Act--Competitive Bidding PP Docket No. 93-253.

Second Memorandum Opinion and Order

Adopted: August 12, 1994; Released: August 15, 1994; By the
Commission:

Table of Contents

Paragraph

I. Introduction.............................................. 1
II. Applicability of Competitive Bidding..................... 7
A. Cellular Unserved Areas................................. 7
B. Principal Use of PCS.................................... 11
III. Auction Design and Procedures........................... 12
A. Activity and Stopping Rules............................. 12
B. Suggested Opening Bid................................... 19
C. Commission Discretion During Auctions................... 21
D. Treatment of Upfront Payments........................... 27
E. Default Penalty......................................... 34
F. Disclosure of Bidding Information....................... 37
G. Standby Queue........................................... 43
H. Filing Fees............................................. 45
I. Waiver Requests in Short Form Applications.............. 47
J. Rules Prohibiting Collusion............................. 48
K. Information Disclosure by Applicants and Licensees...... 54
L. Application-Processing Rules............................ 58
M. Financial Qualifications................................ 61
IV. Designated Entities...................................... 64
A. Introduction............................................ 64
B. Rural Telephone Company Definition...................... 67
C. Rural Telephone Consortia............................... 81
D. Affiliation Rules....................................... 86
E. Rural Telephone Company Bidding Credits................. 105
F. Rural Telephone Company Eligibility for Installment
Payments.................................................. 116
G. Rural Telephone Company Partitioning.................... 123
H. Unjust Enrichment Provisions............................ 125
I. Upfront Payment......................................... 129
J. Installment Payments.................................... 132
K. Eligibility Issues...................................... 134
L. Small Business.......................................... 144
V. Final Regulatory Flexibility Analysis..................... 151
VI. Procedural Matters and Ordering Clauses.................. 155

I. Introduction

1. By this action, we respond to petitions for reconsideration or
clarification of the rules and policies adopted in the Second Report
and Order in this proceeding, which sets forth general rules for the
use of competitive bidding to award licenses.1 Twenty-one such
petitions were received, as well as eight oppositions and five replies.
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\1\Second Report and Order, PP Docket No. 93-253, 9 FCC Rcd
2348, 59 FR 22980, May 4, 1994 (Second Report and Order).
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2. On August 10, 1993, the Omnibus Budget Reconciliation Act of
1993 (the Budget Act) added Section 309(j) to the Communications Act of
1934, as amended, 47 U.S.C. Sec. 309(j).2 Section 309(j) gives the
Commission express authority to employ competitive bidding procedures
to choose among mutually exclusive applications for initial licenses.
The Commission adopted a Notice of Proposed Rulemaking in this
proceeding on September 23, 1993.3 The Second Report and Order
prescribing the required regulations was adopted on March 8, 1994. The
Commission has subsequently adopted specific rules for auction of
narrowband Personal Communications Service (PCS) licenses,4
Interactive Video and Data Service (IVDS) licenses,5 and broadband
PCS licenses.6
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\2\See, Omnibus Budget Reconciliation Act of 1993, 47 U.S.C.
309(j)(3)(B).
\3\Notice of Proposed Rule Making in PP Docket No. 93-253, 8 FCC
Rcd 7635, 58 FR 53489 (Oct 15, 1993), (NPRM). In the First Report
and Order in PP Docket No. 93-253, FCC 94-32, released February 4,
1994, 59 FR 09100 (Feb 25, 1994), (First Report and Order), the
Commission prescribed transfer disclosure requirements with respect
to licenses awarded by random selection.
\4\Third Report and Order in PP Docket No. 93-253, 9 FCC Rcd
2941, 59 FR 26741, May 24, 1994 (Third Report and Order).
\5\Fourth Report and Order in PP Docket No. 93-253, 59 FR 24947,
May 13, 1994 (Fourth Report and Order).
\6\Fifth Report and Order in PP Docket No. 93-253, FCC 94-178,
59 FR 37566, July 29, 1994, adopted June 29, 1994, released July 15,
1994 (Fifth Report and Order).
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3. The Second Report and Order established rules for determining
what types of services and licenses may be subject to auctions. The
Second Report and Order also set forth a range of auction designs and
procedures, from which the Commission stated it would choose in
establishing procedures for awarding licenses in specific services. The
Second Report and Order addressed a variety of procedural issues
regarding announcement of auctions, filing of applications, bidder and
licensee qualifications, payment requirements, and penalties for
default or disqualification, as well as safeguards to deter possible
abuses of the bidding and licensing process. In response to statutory
directive, the Second Report and Order also identified provisions
designed to ensure that small businesses, rural telephone companies,
and businesses owned by women or members of minority groups (designated
entities) are given the opportunity to participate in the provision of
spectrum-based services.
4. In many cases, the appropriate auction procedures and rules vary
from service to service. In the Second Report and Order we retained the
flexibility to choose, from within a defined range, the appropriate
procedures for particular services, depending on characteristics of the
service such as the likely value and interdependence of the licenses
being auctioned and the capital required to construct a system. We also
retained the flexibility to alter our procedures in response to our
experience with different auction techniques.
5. We dispose of all but two of the petitions for reconsideration
of the Second Report and Order in this Order. We defer consideration of
Brown and Schwaninger's petition concerning Finder's Preferences. We
plan to issue a Further Notice addressing the applicability of Finder's
Preferences to auctionable services in the near future, and we will
consider Brown and Schwaninger's petition in the context of that
Notice. We also defer to a future Order consideration of MCI's petition
concerning auctioning of BETRS licenses.
6. The issues raised in the petitions for reconsideration fall into
three categories: those dealing with the applicability of competitive
bidding to specific services and particular circumstances, those
dealing with auction design and procedures, and those dealing with the
definition of the groups eligible for special provisions (the
``designated entities'') and the nature of these provisions. We
consider issues raised by these petitions below.

II. Applicability of Competitive Bidding

A. Cellular Unserved Areas
7. Two cellular systems operate on separate frequency blocks in
each cellular market.7 The geographic areas not covered after five
years by the initial licensees are considered cellular ``unserved
areas'' that are licensed separately. In 1991, we adopted random
selection procedures to govern licensing of the cellular unserved
areas,8 and stated that we would revisit this decision to use
lotteries if Congress authorized Commission use of competitive bidding
procedures.9 As noted above, competitive bidding authority was in
fact enacted in 1993.10
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\7\The Domestic Public Cellular Service is governed by Part 22
of the Commission's Rules, 47 CFR Part 22.
\8\See First Report and Order and Memorandum Opinion and Order
on Reconsideration, CC Docket No. 90-6, 6 FCC Rcd 6185, 56 FR 58503,
Nov 20, 1991.
\9\Id. at 6217.
\1\0See Budget Act, 107 Stat. 387-392.
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8. After receiving comment and considering the extensive record,
the Commission indicated in the Second Report and Order that, unless
specifically excluded, mutually exclusive applications for licenses in
the Public Mobile Services, including the Cellular Service, will be
subject to competitive bidding if they were filed after July 26,
1993.\11\ We noted, however, that applications filed before July 26,
1993 present special issues due to the ``special rule'' of Section
6002(e) of the Budget Act.\12\ That rule does not require the
Commission to award licenses or permits by competitive bidding if the
license applications were filed before July 26, 1993, even if the
applications otherwise meet the criteria that would subject them to
selection by bidding.\13\ We therefore stated in the Second Report and
Order that we would determine in a separate order how to authorize
Public Mobile systems if applications were filed before July 26,
1993.\14\ Subsequently, after thorough consideration of the record, we
adopted a Memorandum Opinion and Order stating that in such situations
we will award licenses for the unserved areas by random selection.\15\
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\11\See Second Report and Order at  61 & n.58.
\12\See id. at n.55, citing Budget Act, Sec. 6002(e).
\13\See Budget Act, Sec. 6002(e).
\14\See Second Report and Order at n.55.
\15\See Memorandum Opinion and Order, PP Docket No. 93-253, FCC
No. 94-123, 59 FR 37163, July 21, 1994, adopted May 27, 1994,
released July 14, 1994 (Memorandum Opinion and Order).
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9. Petitions. We received three petitions for reconsideration of
the provisions of the Second Report and Order related to authorization
of the cellular unserved areas.\16\ John G. Andrikopoulos, et al.
(Andrikopoulos) states that where applications for cellular unserved
area licenses were accepted for filing before July 26, 1993, the
applications should not be subject to competitive bidding.
Andrikopoulos asserts that auctioning these licenses would be
unreasonable, retroactive application of the Budget Act.\17\ The
Houston, Dallas, Oxnard and Huntington Cellular Settlement Groups
(Cellular Settlement Groups; Groups) assert that the Commission should
accept full-market settlements between mutually exclusive applicants
for cellular unserved area licenses.\18\ These Groups state that
Congress intended the Commission to continue use of its existing policy
favoring full-market settlements, and express concern that the Second
Report and Order appears to profit full-market settlements where
licenses will be awarded through competitive bidding procedures.\19\
Finally, Thumb Cellular, a party to a full-market settlement agreement
filed for a Detroit unserved area, asks the Commission to process its
settlement agreement immediately.\20\
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\16\See petitions of Thumb Cellular Limited Partnership (Thumb
Cellular), John Andrikopoulos, et al. (Andrikopoulos), and cellular
settlement groups in Houston, Dallas, Oxnard and Huntington
(Cellular Settlement Groups).
\17\See Andrikopoulos Petition at 4-5.
\18\See Cellular Settlement Groups Petition at 3-7.
\19\Id.
\20\Thumb Cellular Petition at 3-4.
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10. Discussion. The issues raised by these petitioners are fully
addressed in the Memorandum Opinion and Order, which was released
shortly after these petitions were filed. We stated in that item that
we will grant licenses for cellular unserved areas by random selection
from the pool of applicants that filed lottery applications prior to
July 26, 1993, and we will permit full-market settlements among lottery
applicants to avoid mutual exclusivity.\21\ Applications for cellular
unserved areas accepted for filing prior to July 26, 1993 will not be
subject to competitive bidding. Accordingly, the issues raised by these
three petitioners are moot.
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\21\See Memorandum Opinion and Order at  10-18.
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B. Principal Use of PCS
11. Section 309(j)(1) of the Communications Act, as amended,
permits auctions only where mutually exclusive applications for initial
licenses or construction permits are accepted for filing by the
Commission and where the principal use of the spectrum will involve or
is reasonably likely to involve the receipt by the licensee of
compensation from subscribers in return for enabling those subscribers
to receive or transmit communications signals.\22\ In the Second Report
and Order we concluded that PCS service would meet the criteria for
auctionablility.\23\ Millin requests that we reverse that decision and
conduct further inquiry concerning the possibility of non-subscription
PCS.\24\ We consider and rejected Millin's arguments in the Fifth
Report and Order in this docket, stating that the overwhelming weight
of the comments in that proceeding, as well as our experience with the
PCS experiments that we have licensed, reflect that licensed PCS
spectrum is likely to be used principally for the provision of service
to subscribers for compensation.\25\ We continue to believe that the
record strongly supports the likelihood that PCS spectrum will be used
principally for the provision of service to subscribers for
compensation. Accordingly, we deny Millin's request.
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\22\47 U.S.C. Sec. 309(j)(1).
\23\See Second Report and Order at  55-56.
\24\See petition of Millin Publications, Inc. (Millin).
\25\Fifth Report and Order at n.8.
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III. Auction Design and Procedures

A. Activity and Stopping Rules
12. Activity rules and stopping rules are intended to govern the
speed and duration of bidding in an auction. An activity rule
encourages each bidder to participate actively through the course of an
auction. Activity rules are intended to ensure that simultaneous
auctions with simultaneous stopping rules will close within a
reasonable period of time and that bid prices will convey meaningful
information during the course of the auction. In the Second Report and
Order, the Commission adopted a three-stage Milgrom-Wilson activity
rule as the preferred activity rule when a simultaneous stopping rule
is employed.\26\ Under this rule the auction moves from stage I to
stage II when, in each of three consecutive rounds of bidding, the high
bid has increased on less than some specified percent of the spectrum
(measured in terms of MHz-pops) being auctioned.\27\ The auction will
move from stage II to stage III when in each of three consecutive
rounds the high bid has increased on less than some specified percent
of the spectrum (measured in terms of MHz-pops). The Commission,
however, retained the flexibility to decide whether to use an activity
rule, and if so what type of activity rule to use. We described
possible activity rules, and stated the range of alternatives from
which we would choose and the circumstances that might cause us to
choose particular rules. We stated that we would announce the activity
rule to be used by Public Notice before an auction.\28\ A stopping rule
specifies when an auction is over. In the Second Report and Order we
stated that, for simultaneous auctions, our preferred stopping rule was
that all markets would close simultaneously if a single round passed in
which no new acceptable bids are submitted for any license. We retained
the discretion, however, to announce at any point during a multiple
round auction would end after a specified number of rounds.\29\
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\26\Second Report and Order at 144.
\27\The number of ``MHz-pops'' is calculated by multiplying the
population of the license service area by the amount of spectrum
authorized by the license.
\28\Id. at 133.
\29\Id. at 132.
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13. Petitions. Southwestern Bell Corporation (SBC), the GTE Service
Corporation (GTE), and the Association of Independent Designated
Entities (AIDE) argue that the three-stage Milgrom-Wilson activity rule
is unnecessarily complex and should be simplified or eliminated.\30\
SBC points out that the three-stage Milgrom-Wilson activity rule would
require the Commission to track a large number of upfront payments and
eligibility levels, and notes that the software the Commission intends
to develop to track activity levels may not be developed in time. SBC
states that allowing five automatic waivers, as the Commission proposes
to do, does not reduce the uncertainty and expense which the activity
rule imposes and may make bidding strategy more complex.\31\ GTE states
that the upfront payment formula, when combined with the activity rule,
unnecessarily restricts bidder flexibility.\32\ GTE states that the
activity rules limit the ability of bidders to revise their plans in
the course of the auction, particularly if information revealed during
the latter stages of the auction causes a bidder to become interested
in additional properties. The activity rules, according to GTE,
discourage qualified entities from participating as fully as they might
otherwise do, so that some licenses may not be awarded to the entity
placing the highest value on them.\33\
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\30\SBC Petition at 1-6; GTE Petition at 6-11; AIDE Petition at
12-13.
\31\SBC Petition at 3-6.
\32\GTE Petition at 7.
\33\Id. at 9-10.
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SBC urges the Commission to alter the stopping rule to allow the
agency to issue a notice that bidding will close after a given number
of rounds.\34\ GTE and SBC ask the Commission to adopt a simpler
activity rule, such as a requirement that bidders be active on a single
license in each round.\35\ AIDE urges that the activity rules be
withdrawn, at least in the case of designated entities.\36\ Pacbell
counters that the three-stage Milgrom-Wilson activity rule avoids
delay, provides meaningful information, and allows bidders the
flexibility to react to that information, and that software is
available to help ensure that the Milgrom-Wilson rule will not be hard
to implement.\37\
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\34\SBC Petition at 5.
\35\GTE Petition at 10-11; SBC Petition at 5.
\36\AIDE Petition at 12-13.
\37\Bell Opposition at ii.
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14. Discussion. As we noted in the Second Report and Order, the
decision to use activity rules and the choice among activity rules
involve tradeoffs among the speed of the auction, bidder flexibility,
and simplicity.\38\ The petitioners raise no issues relating to
activity rules that we did not consider carefully in the Second Report
and Order.\39\ We see nothing in the petitions for reconsideration to
cause us to change our opinion concerning the choices we made among
these goals.
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\38\Second Report and Order at  134.
\39\For instance, GTE notes that a bidder may be interested in
some properties only if it can also acquire other key properties.
GTE states that ``under the modified Milgrom-Wilson rule, the bidder
could be forced to choose between dropping out of the auction
prematurely or staying active in markets that may prove to be less
valuable if the bidder loses out in the other key markets.'' GTE
Petition at 9-10. The Second Report and Order considers the same
situation of interdependency and concludes that a bidder would have
more flexibility with the three-stage Milgrom-Wilson rule than with
another possible activity rule, that of starting the bidding with
the third stage of the Milgrom-Wilson rule. See Second Report and
Order at  142.
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15. We do not believe that the Milgrom-Wilson activity rules will
excessively restrict bidders' flexibility to bid for desired
combinations of licenses or cause licenses to be awarded to bidders who
value them less than other bidders. The rules were expressly designed
to counteract the incentive to delay serious bidding that occurs in
simultaneous auctions, without unduly limiting bidders' flexibility to
pursue backup strategies and to use new information.\40\ The
restrictions placed on bidders at the beginning of the three-stage
auction procedure are modest. In the first stage, to retain full
eligibility a bidder need only bid on, or have the highest bid from the
previous round on, licenses representing at least one-third of the MHz-
pops he or she ultimately hopes to win. In the second stage, the bidder
must bid on, or hold the high bid on, two-thirds of the MHz-pops he or
she hopes to win. Only in the third stage are bidders required to bid
on the full amount of MHz-pops they hope to acquire.\41\ Bidders may
shift bids among any combination of licenses from round to round.\42\
Paul Milgrom points out that at the shift from stage I to stage II
there will be no more than three bidders on an average license, and at
the shift to stage III there will be at most 1\1/2\ bidders on an
average license.\43\ Because the progression to higher stages imparts
such information, it gives the bidders important signals concerning the
state of bidding. By stage III, bidding should be rapidly drawing to a
close, and any major shifts in strategy should already have been
implemented. Bidders who believe that they may want to expand their
purchases if prices are unexpectedly low can guarantee their ability to
do so by making a sufficiently high upfront payment.
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\40\Id.
\41\Id. at  137.
\42\Id. at  136.
\43\Ex parte submission of Paul Milgrom, June 21, 1994 at 2.
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16. In the Second Report and Order, we also stated our intention to
reduce the complexity faced by bidders by developing bidding software
and making it available to all bidders in auctions in which a Milgrom-
Wilson activity rule is used.\44\ SBC expresses concern that the
software may not be available in time. Software was in fact developed
in time for the July nationwide narrowband auction, and performed
successfully in that auction. In light of that success, we have no
doubt that appropriate software will also be available for the
remaining narrowband and broadband auctions.
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\44\Second Report and Order at  143.
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17. Finally, we remind petitioners that, in the Second Report and
Order, we adopted the three-stage Milgrom-Wilson activity rules only as
a preferred option.\45\ We deferred to later, service-specific Orders
the choice of actual rules to be used in auctions for individual
services, depending, as discussed in the Second Report and Order, on
the characteristics of the services and our experience with the conduct
of auctions. In addition, we retained the flexibility to decide on an
auction-by-auction basis, and to announce by Public Notice before the
auction, whether to use an activity rule, and if so what type of
rule.\46\ Thus, if experience shows that the Milgrom-Wilson rules are
unduly difficult to administer, we may shift to other activity rules,
including the one recommended by petitioners requiring only that
bidders be active on a single license in each round. We also expressly
retained the discretion, requested by SBC, to announce at any point
during a multiple round auction that the auction will end after some
specified number of additional rounds.\47\
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\45\Second Report and Order at  144.
\46\Id. at  133.
\47\Id. at  132.
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18. In the Second Report and Order the Commission also retained the
ability to speed up an auction by announcing at any time during an
auction that the next stage of the auction will begin in the next
bidding round.\48\ In this Order the Commission wishes to make explicit
that this discretion could be exercised by employing an alternative
rule for moving from one stage of the auction to the next. The
Commission will announce by Public Notice prior to an auction its
intent to use an alternative rule. One possible alternative rule would
be that the auction will move to the next stage if in each of some
fixed number of rounds, bidding activity is below some level measured
as the ratio of new bids (measured in terms of MHz-pops) to available
licenses (measured in terms of MHz-pops). The ratio of new bids to
licenses may be a better measure of bidding activity than the
percentage of total licenses on which the high bid has increased
(measured in terms of MHz-pops) because it accounts for the possibility
that bidding may be concentrated on a few licenses. In contrast, the
latter measure indicates the same level of bidding activity regardless
of how many bids are made on a given set of licenses.
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\48\Id. at n.110.
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B. Suggested Opening Bid
19. In the Second Report and Order, we stated that in multiple
round auctions the Commission will generally specify minimum bid
increments to speed the progress of the auction.\49\ The bid increment
is the amount or percentage by which the bid must be raised above the
previous round's high bid in order to be accepted as a valid bid in the
current round. We retained the discretion to use a ``suggested''
minimum bid increment rather than a required bid increment.\50\
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\49\Second Report and Order at 124.
\50\Under a suggested minimum bid increment rule, the auction
would close if no bids or only one bid was submitted that was above
the minimum bid increment. Id. at n. 102.
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20. In the recent nationwide narrowband auctions, it became
apparent that the Commission may need further tools to avoid
unnecessarily long auctions. In order to expedite the auction process
further, we also reserve the discretion to establish a suggested
opening bid on each license in addition to the minimum bid
increment.\51\ Where we adopt a suggested opening bid, initial bids
will have to be above the minimum bid increment but may be below the
suggested opening bid. Generally, we will establish suggested opening
bids in the range of $.02-$.20 per pop per MHz for each license. This
suggested opening bid will provide bidders with an incentive to start
bidding at a substantial portion of the license value, thus ensuring a
rapid conclusion of the auction.
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\51\See ex parte submission of Paul Milgrom, May 19, 1994.
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C. Commission Discretion During Auctions
21. In the Second Report and Order, and discussed supra, we chose
our primary auction methodology, but noted that no one auction design
is optimal for all auctionable services. We stated that we would adopt
auction rules for specific services in subsequent Report and Orders,
based on criteria established in the Second Report and Order. We
further stated that when we announced individual auctions for specific
services, we would specify more detailed procedures for those auctions
in a Public Notice, but that those procedures also would be governed by
criteria set forth in the Second Report and Order.\52\ Our rules also
afforded flexibility with respect to some auction procedures, such as
those governing the duration of bidding rounds, minimum bid amounts,
and stopping rules, and we stated that we might make decisions
regarding such matters during the course of an auction.\53\
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\52\Id. at 68.
\53\Id. at 123, 126, 132.
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22. Petition. The National Association of Business and Educational
Radio, Inc. (``NABER'') asserts that the auction rules do not comply
with the public interest and the Administrative Procedure Act\54\
because they allow the Commission to circumvent the normal notice and
comment procedure, and that the rules prevent providers of service from
devising a business plan and auction strategy in advance.\55\ NABER
states that the Commission should eliminate its discretion to change
the auction rules or procedures during a particular auction, that
bidders need to know the rules which will apply for a particular
service auction, and that interested parties should have the
opportunity to provide meaningful comment before the final auction
rules for particular services and frequencies are set.\56\ NABER
asserts that should the Commission change bidding methods in mid-stream
without prior public comment, the Commission would violate the notice
and comment rulemaking requirements of the Administrative Procedure
Act, by its failure to keep a record and analyze and consider all
relevant matter regarding those new rules.\57\
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\54\See Administrative Procedure Act, 5 U.S.C. Secs. 551 et seq.
\55\NABER Petition at 2.
\56\Id. at 8.
\57\Id. at 9; see 5 U.S.C. Sec. 553.
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23. Discussion. We believe that the process we have used to adopt
auction designs and implementation procedures and the rules themselves
fully comply with the Administrative Procedure Act. In the NPRM in this
docket, we provided notice of the auction designs we were considering
and requested comment on issues of auction design and procedure. We
received voluminous public comment on these issues. In the Second
Report and Order, we carefully considered all comments and suggestions
concerning a wide variety of proposed auction designs, including the
comments and proposals of numerous experts in auction theory. We have
established a broad framework for the conduct of license auctions,
specifying a menu of auction designs and procedures from which we will
choose for individual auctions. We have identified our preferred
options, and have discussed the circumstances in which we believe the
various options will be most appropriate in order to serve our
statutory goals, and which are therefore most likely to be chosen.
After the Second Report and Order was issued, we made, in addition,
more specific choices of auction designs for particular services in
Orders dealing with those services.\58\ We have also established
application, payment, and penalty procedures for individual
services.\59\ The procedures, we believe, afforded members of the
public all of the procedural rights to which they are entitled under
the Administrative Procedure Act.
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\58\See Third Report and Order at 16-40, Fourth Report and
Order at 11-18, and Fifth Report and Order at 27-57.
\59\See Third Report and Order at 41-60, Fourth Report and
Order at 19-29, and Fifth Report and Order at 58-92.
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24. Our rules, however, must also be flexible enough so that we can
adjust our procedures to fit the circumstances of individual auctions.
We will not know until we have gained some experience with simultaneous
multiple round auctions exactly what values of such parameters as
bidding increments and triggers for movement to the next auction phase
work best under what circumstances. Consequently, we believe that it is
important for those running the auctions to be able to use information
generated in the early auctions and in the early rounds of individual
auctions. Further, it may be important to be able to respond to the
behavior of bidders in the course of particular auctions. We may find
it desirable to allow more time for consultation between bidding rounds
in complex auctions, for instance, or, in light of the statutory
requirement to issue licenses expeditiously, to increase the bidding
increment to hasten the conclusion of an auction if the auction is
proceeding slowly. Clearly, notice and comment procedures would be
unworkable in such cases. The flexibility that our rules permit us is
analogous to the ad hoc decisional authority that may be exercised
within other types licensing proceedings, and our discretion here is
similarly constrained by the general framework and standards embodied
in our rules. The latitude remaining to the Commission to alter auction
procedures is, however, necessary to ensure that we can make
improvements as we become aware of the need for them, and that we can
manage auctions efficiently. The Commission will exercise its
discretion in a manner consistent with our clearly articulated goals
and the general procedures we have established.
25. We have also taken care to safeguard bidders' interests. During
the course of an auction only minor adjustments in procedures are
permitted that will necessitate no major changes of strategy on their
part. Further, we have stated clearly which procedures are, and which
are not, subject to change during the course of an auction, so that
bidders will know what kinds of changes to expect and to prepare for.
We have stated that when we announce auctions for particular services
by public notice, we will also announce the procedures to be used in
those auctions.\60\ We believe that this approach will provide
prospective bidders with ample information to plan rational bidding
strategies.
---------------------------------------------------------------------------

\60\Second Report and Order at 68.
---------------------------------------------------------------------------

26. Finally, although the Commission has never before used auctions
as a licensing method, we note that our auction procedures afford as
much, or more, detailed guidance to bidders than is usually provided in
advance of an auction. For example, in conventional oral auctions the
auctioneer customarily has the discretion to alter bid increments and
other procedures at will in any manner and at any time during an
auction. As in other types of auctions, we believe that it will be
critically important to the success of our auctions to leave the
Commission some discretion to fine-tune auction procedures between
auctions and, in some cases, on an ad hoc basis, during the course of
an auction. Accordingly, we affirm our original decisions to adopt
rules that afford the Commission some flexibility to modify its
procedures during the course of an auction, within the scope of the
options we have delineated and under the circumstances described above.
D. Treatment of Upfront Payments
27. In the Second Report and Order we required bidders to tender a
substantial payment in advance of the auction in order to deter
frivolous or insincere bidding.\61\ Upfront payments were also intended
to provide a source of funds for collection of penalties for bid
withdrawal.\62\ The amount of the upfront payment was related to the
level of eligibility the bidder wished to establish, measured in terms
of the population and amount of spectrum encompassed by the licenses on
which the bidder was permitted to bid. In some cases the upfront
payment could amount to millions of dollars.\63\ We required that
upfront payments be submitted prior to bidding, and we did not permit
use of letters of credit or Treasury bills for upfront deposits due to
administrative difficulties in accepting payment in such forms, at
least until the Commission has more experience in conducting
auctions.\64\ We stated that upfront payments made by a winning bidder
would be applied to satisfy its down payment obligations, and that
losing bidders' upfront payments would be returned if they wished to
withdraw from further bidding.\65\
---------------------------------------------------------------------------

\61\Second Report and Order at 171.
\62\Id. at 176.
\63\Id. at 172, 173.
\64\Id. at 182, 184, 185.
\65\Id. at 187, n.140.
---------------------------------------------------------------------------

28. Petitions. GTE asserts that the Commission should adopt an
interest-bearing evergreen deposit procedure for upfront deposits.\66\
GTE states that, since the Commission is not currently authorized to
establish interest-bearing accounts, substantial sums of money could be
tied up in upfront deposits without any accrual of interest for
substantial periods of time. GTE asserts that maximum bidder
flexibility can be achieved by allowing bidders to add or withdraw
deposit funds during the course of the auction. GTE states that the
Commission needs to ensure that it has the requisite authority to
permit the accumulation and payment of interest.
---------------------------------------------------------------------------

\66\GTE Petition at 11-13.
---------------------------------------------------------------------------

29. AIDE states that when a winning bidder's upfront payments, less
bid withdrawal penalties, exceed the required deposit, the excess
upfront payment should remain available for crediting to another
auction or for refund to the winning bidder.\67\ AIDE points out that,
in the case of designated entities, the required deposit is only 10
percent. AIDE notes that the Commission has stated that it will apply
this policy for losing bidders, and as a matter of equal protection the
Commission should apply the same policy to winning bidders with excess
upfront payments.\68\
---------------------------------------------------------------------------

\67\AIDE Petition at 15.
\68\Id. at 16.
---------------------------------------------------------------------------

30. AIDE requests clarification of footnote 133 in the Second
Report and Order.\69\ Footnote 133 reads:
---------------------------------------------------------------------------

\69\Id. at 13.
---------------------------------------------------------------------------

For example, an entity that is interested in bidding on several 30
MHz PCS licenses with a goal of providing service to a population of at
most 50 million should make an upfront payment of $30 million ($.02 x
30 MHz x 50,000,000). That bidder will not be permitted to bid (at any
time) in the auction, or be permitted to win, 30 MHz licenses covering
more than 50 million pops.
31. Discussion. Allowing bidders to add funds to upfront deposits
in order to increase their eligibility level, or to withdraw funds from
upfront deposits, as GTE recommends, would add greatly to the
complexity of the Commission's administrative task. The Commission
would have to keep track of changes in eligibility due to changes in
upfront payments, as well as to changes in bidders' activity levels,
and would have to ascertain that fund transfers had taken place before
permitting bidders to bid at the levels to which the additional
payments entitled them. Because of the short intervals between rounds,
delays in the transfer of funds would likely create problems for both
bidders and the Commission. For these reasons, we believe it is prudent
to require bidders to submit upfront payments that represent the
maximum level of bidding that they anticipate before the beginning of
the auction. Bidders can always ensure that they will be able to expand
their bidding above their originally anticipated level by submitting a
sufficiently large upfront payment and maintaining a high activity
level.
32. We agree with AIDE that winners' upfront deposits, in excess of
their required down payment deposits and any penalties they may owe,
should be refunded expeditiously. We intend to refund excess upfront
deposits of all bidders as soon as possible. We will not apply excess
upfront deposit balances to subsequent auctions, however, due to the
additional administrative difficulty of tracking the funds.
33. With respect to AIDE's request for clarification, we clarify
that footnote 133 means that in any round of the auction, a bidder who
has made an upfront payment of $30 million may bid on, or hold the high
bid from the previous round on, 30 MHz licenses in markets with a
combined population totaling not more than 50 million. The specific
licenses on which the bidder submits bids may vary from round to round,
but the total MHz-pop ceiling cannot be exceeded in any single round.
E. Default Penalty
34. In the Second Report and Order the Commission imposed a default
penalty for withdrawing a bid after a simultaneous multiple round
auction has closed.\70\ This default penalty was set at 3 percent of
the amount of the winning bid the next time the license is offered by
the Commission, or 3 percent of the amount of the defaulting bidder's
bid, whichever is less. The default penalty would be imposed in
addition to the bid withdrawal penalty, which was set at the difference
between the amount bid and the amount of the subsequent winning bid. We
stated that the default penalty was intended to provide an incentive
for bidders who wished to withdraw their bids to do so before the close
of the auction. We stated that such a penalty was appropriate because a
withdrawal that occurs after an auction closes is likely to be more
harmful than one that occurs before closing. We stated that if a
withdrawal occurs after the auction closes, other bidders will have
little opportunity to revise their strategies, and the likelihood will
be lower that the licenses will be awarded to those who value them
most. We also stated that default imposes on the government the extra
costs of re-auctioning the license.
---------------------------------------------------------------------------

\70\ Second Report and Order at 154.
---------------------------------------------------------------------------

35. Petition. AIDE asserts that the default penalty will produce a
windfall to the Treasury if the winning bid exceeds the defaulting bid
by more than 3 percent.\71\ AIDE states that the defaulting bidder
should pay no penalty if the second bid exceeds the defaulting bid by 3
percent or more, and that if the second bid exceeds the defaulting bid
by less than 3 percent, the defaulting bidder's penalty should be the
difference between the second winning bid and 103 percent of the
defaulting bid.
---------------------------------------------------------------------------

\71\AIDE Petition at 14.
---------------------------------------------------------------------------

36. Discussion. We believe that it is appropriate to charge the
full 3 percent default penalty in addition to the bid withdrawal
penalty whether or not the winning bid in the second auction exceeds
the defaulting bid. As we stated in the Second Report and Order, the
function of the default penalty is to encourage bidders who plan to
withdraw their bids to do so before the close of the auction.\72\ The
additional costs to the Commission and to other bidders of auctioning
the license a second time, and the increased likelihood that the
license will not be won by the bidder who values it most, are incurred
as a consequence of default regardless of the level of the bids. Even
if the winning bid is higher than the defaulting bid, we have no reason
to believe that it is higher than the winning bid would have been had
the defaulting bidder withdrawn before the close of the auction, nor
have we reason to believe that a high winning bid compensates for the
undesirable effects of default. Consequently, we retain the default
penalty as set forth in the Second Report and Order.
---------------------------------------------------------------------------

\72\Second Report and Order at 154.
---------------------------------------------------------------------------

F. Disclosure of Bidding Information
37. In the Second Report and Order the Commission recognized the
informational benefits to be gained from releasing bidder identities
during an auction, but concluded that such information should not be
released because ``the risk of collusion and strategic manipulation
outweighs the benefits of the additional information.'' Instead the
Commission adopted an intermediate approach pursuant to which the
bidder identification numbers and bid amounts for each bidder will be
released at the end of each round of bidding. This approach provides
bidders with useful information without incurring excessive risks of
collusion and strategic manipulation.\73\
---------------------------------------------------------------------------

\73\Id at 158.
---------------------------------------------------------------------------

38. Petitions. GTE and Southwestern Bell request that the
identities of bidders be released during the course of the auction. GTE
requests that the identity of the bidder associated with each bidder
identification number be disclosed during the bidding process.\74\ SBC
states that the Commission should announce both the identity of the
highest bidder and the bid amount for each round of the auction.\75\
GTE argues that a bidder must construct a strategy based on its own
valuation of the spectrum as well as estimates of its competitors'
valuations and past bids, and that a fundamental component of this
exercise is knowledge of who the competitors are. GTE notes that the
Commission's sole justification for not furnishing information about
the identity of bidders is a concern for collusion, and states that the
Second Report and Order includes other mechanisms for minimizing
collusion. GTE states that increases in available information raise the
level of competition and the efficiency of license assignments, and
that access to bidder identification information may increase revenue
from the auction process while ensuring award to the bidder who most
highly values the license.\76\ SBC argues that the decision to keep
winning bidder identities secret creates an opportunity for collusive
behavior because cartels could coordinate activities and punish
violators without detection. SBC notes that if the identity of all
bidders is known, the Commission and bidders need not be concerned with
protecting bidders' identity. SBC states that knowing who the
successful bidders are affects other bidders' ability to assess the
accuracy of their valuation of the spectrum and allows them to
ascertain that an aggregation of licenses is underway which might pose
a competitive threat. MCI states that because of the potential for
bidder collusion and strategic manipulation, bidder identities should
not be revealed.\77\
---------------------------------------------------------------------------

\74\GTE Petition at 4-6.
\75\SBC Petition at 8-10.
\76\GTE Petition at 5-6.
\77\MCI Comments at 3.
---------------------------------------------------------------------------

39. Discussion. Arguments in favor of disclosing bidder identities
primarily turn on the value of the information in improving the quality
of bids. Some auction experts argue that bidders' estimates of license
values can be improved by comparing them to the valuations of their
competitors.\78\ Bidders' valuations of licenses may also be highly
dependent on knowing the identity of neighboring carriers, especially
regional leaders and competitors, and on knowing the manner in which
complementary licenses are likely to be used and the compatibility of
standards both inside and outside their desired service areas.
Maximizing information available to bidders may increase bids by
decreasing bidders' incentives to reduce their bids to avoid the
``winner's curse,'' the tendency for the bidder who most overestimates
the value of the item for sale to win an auction. Revealing bidder
identities may facilitate awarding licenses to those who value them
most highly by providing more information to bidders. More accurate
valuation of licenses by bidders can thus improve the efficiency of
license assignments. In addition, publicly disclosing the identity of
other bidders may encourage vigorous bidding for licenses. Releasing
bidder identities may increase interest in and media coverage of the
auctions.
---------------------------------------------------------------------------

\78\See e.g. comments of PacBell on NPRM, Attachment by Paul R.
Milgrom and Robert B. Wilson at 21.
---------------------------------------------------------------------------

40. Our experience with the first narrowband PCS auction showed
that preventing bidder identities from being revealed can be extremely
difficult. In addition, if some but not all bidders know other bidders'
identities, those bidders have an advantage in the quality of
information available to them and in the potential ability to thwart
others' bidding strategies. Concealing bidder identities may give an
advantage to larger bidders that have the resources to devote to
discovering other bidders' identities.
41. As we noted in the Second Report and Order, however, releasing
the identities of high bidders may foster strategic manipulation, such
as bidding up the prices of licenses needed by rivals, and may
facilitate collusion.\79\ Some auction experts argue that anonymity
makes it harder to target a firm for strategic hold-up because the
bidding and aggregation strategies of specific competitors cannot be
easily detected.\80\ Concealing bidder identities makes initiating
collusive arrangements during the course of an auction more difficult
because bidders will not easily be able to identify the parties against
whom they are bidding, unless those parties voluntarily reveal their
identities. On the other hand, concealing bidders' identities may not
be critical to preventing collusion during an auction; existing
antitrust laws and the FCC's collusion rules should be adequate to
prevent collusive conduct. In any event, under an anonymous bidding
scenario, if bidders want to collude they can simply disclose their
bidder identification numbers to one another before the auction.
---------------------------------------------------------------------------

\79\Second Report and Order at 158.
\80\Comments of NYNEX on NPRM, attachment by Robert G. Harris
and Michael L. Katz, ``A Public Interest Assessment of Spectrum
Auctions for Wireless Telecommunications Services'' at 9.
---------------------------------------------------------------------------

42. Because of the advantages of providing more information to
bidders and the difficulties involved in ensuring that bidder
identities remain confidential, we will generally release the
identities of bidders before each auction. However, we recognize that
experts disagree on the potential for knowledge of bidders' identities
to facilitate collusion and other strategic behavior. Consequently we
wish to have the flexibility to conceal bidder identities if further
experience shows that it would be feasible and desirable to do so. We
may also wish to test the effects of releasing identities of bidders.
Consequently we are reserving the option to withhold bidder identities
on an auction-by-auction basis. If we decide to withhold bidder
identities for a particular auction, we will announce that decision by
a service-specific auction Order. We will announce by Public Notice
prior to each auction whether the identities of bidders will be made
public in that auction.
G. Standby Queue
43. Petition. GTE states that for 10 MHz blocks in broadband PCS
the Commission should adopt the ``standby queue'' bidding mechanism
considered in experiments sponsored by the National Telecommunications
and Information Administration and conducted at the California
Institute of Technology.\81\ The standby queue allows parties seeking
individual licenses to coordinate their bids in order to beat a bid for
a combination of licenses. GTE asserts that the standby queue would
allow bidders seeking to combine smaller blocks into a larger set of
frequencies, or to combine blocks on a geographic basis, to obtain
information about the status of bidding that would permit them to bid
rationally and efficiently.
---------------------------------------------------------------------------

\81\GTE Petition at 13-14.
---------------------------------------------------------------------------

44. Discussion. The standby queue is a mechanism to be used in
conjunction with combinatorial auctions. In the Fifth Report and Order
we concluded that the disadvantages of combinatorial bidding were
likely to outweigh the advantages for auctions of broadband PCS
licenses, and we adopted simultaneous multiple round bidding as our
auction methodology for broadband PCS licenses. Nevertheless, we left
open the option to use combinatorial auctions if simultaneous multiple
round auctions do not result in efficient aggregation of licenses, and
if there are significant advances in the development of combinatorial
auctions.\82\ Although we have no current plans to use combinatorial
auctions, if in the future we do adopt such an auction methodology we
will consider the use of a standby queue mechanism.
---------------------------------------------------------------------------

\82\Fifth Report and Order at 35.
---------------------------------------------------------------------------

H. Filing Fees
45. Petition. William E. Zimsky (Zimsky) states that the rule
imposing filing fees for the filing of short-form applications for
auctions should be deleted.\83\ Zimsky asserts that because there is no
provision in 47 U.S.C. Sec. 158(g) for imposing the filing fee for the
new short-form application, the Commission lacks the statutory
authority to impose such a fee. Zimsky also asserts that, even if the
Commission has such statutory power, to impose a filing fee on all
bidders is unreasonable because the filing fee was designed to recoup
the costs of fully processing the application. Since only auction
winners will submit long-form applications and have their applications
scrutinized, the losing bidders do not receive this service.
Consequently, the Commission's proposed scheme is unconstitutional, he
argues, because a user fee which is not reasonably related to, or a
fair approximation of, the cost incurred by the government in providing
the service for which the fee is assessed, effects a taking of
applicants' property without just compensation, in violation of their
fifth amendment rights. Zimsky cites Webb's Fabulous Pharmacies, Inc.
v. Beckwith, 449 U.S. 155, 163 (1980); United States v. Sperry Corp.,
493 U.S. 52, 60 (1989) in support of his argument.
---------------------------------------------------------------------------

\83\See William E. Zimsky Petition.
---------------------------------------------------------------------------

46. Discussion. The Commission has requested express statutory
authority to impose section 8 application fees for short-form
applications. In the absence of such express authority, we do not
currently impose fees for short-form applications. However, long-form
applications in most services are subject to fees under section 8.
Consequently we find Zimsky's petition to be moot, and we dismiss it.
I. Waiver Requests in Short-Form Applications
47. Cable & Wireless, Inc. (CWI) asks that the Commission
reconsider its rules that appear to mandate dismissal of the short-form
application (Form 175) that do not certify compliance with the foreign
ownership provision of Section 310 of the Communications Act,
notwithstanding the filing of a request for waiver or other relief.\84\
CWI asserts that the Commission should permit participation at auction
where the applicant certifies to the pendency of such a waiver request.
In considering the acceptance for filing of short-form applications,
the Commission will accept certifications that state that a request for
waiver or declaratory ruling concerning the requirements of section 310
is pending.\85\
---------------------------------------------------------------------------

\84\See petition of CWI.
\85\On January 5, 1994, CWI also filed a petition seeking a
declaratory ruling that the public interest warrants grant of common
carrier radio license applications to U.K. citizens and/or
corporations that possess ownership interests in excess of the
foreign ownership benchmarks in Section 310(b)(4) of the
Communications Act. We expect to address the merits of this petition
in a separate Declaratory Ruling.
---------------------------------------------------------------------------

J. Rules Prohibiting Collusion
48. In order to prevent collusion in bidding, the Commission in the
Second Report and Order stated, * * * bidders will be required to
identify on their short-form applications any parties with whom they
have entered into any consortium arrangements, joint ventures,
partnerships or other agreements or understandings which relate in any
way to the competitive bidding process. Bidders will also be required
to certify on their short-form applications that they have not entered
into any explicit or implicit agreements, arrangements or
understandings of any kind with any parties, other than those
identified, regarding the amount of their bid, bidding strategies or
the particular properties on which they will or will not bid * * *.
After such applications are filed and prior to the time that the
winning bidder has made its required down payment, all bidders will be
prohibited from cooperating, collaborating, discussing or disclosing in
any manner the substance of their bids or bidding strategies with other
bidders, unless such bidders are members of a bidding consortium or
other joint bidding arrangement identified on the bidder's short form
application.\86\
---------------------------------------------------------------------------

\86\Second Report and Order 225.
---------------------------------------------------------------------------

49. Petition. BET Holidays, Inc. (BET) states that the above
requirements prevent bidders from entering into any new agreements,
joint ventures or similar arrangements with other entities after filing
a short-form application.\87\ BET claims that as a consequence bidders
may be locked into bidding arrangements significantly before the
commencement of the auctions, and will be unable to modify their
bidding strategies, consult with experts or others, or enter into
alliances with new parties any time after the filing of the short-form
application. BET states that the collusion rule is an unrealistic
constraint on lawful business behavior. For example, according to BET,
if a company does not identify affiliates or others with whom it must
consult, the company would be forbidden from soliciting research,
sharing resources, or discussing its bids until after the winning
bidder tenders its down payment.\88\ BET requests that the Commission
rely on antitrust law as a safeguard against collusion.
---------------------------------------------------------------------------

\87\BET Petition at 10.
\88\Id. at 11.
---------------------------------------------------------------------------

50. Discussion. While we intend to rely primarily on the antitrust
laws to prevent bidding collusion, we believe that the anticollusion
rules in the Second Report and Order will provide an important tool
that will enable the Commission to detect, prevent, and punish
collusion. To prevent and detect collusion, we believe that it is
important to have clearly stated rules concerning the entities with
whom communication about bidding strategies is permissible. The
requirement that an entity identify at the time of the short-form
application those affiliates, or others with whom it has agreements
concerning bidding, and the prohibition of communication concerning
bidding with entities identified by other bidders, serve this purpose
and are not particularly burdensome. Similarly, prohibiting additional
agreements and alliances concerning bidding between applicants bidding
for the same licenses, after applications have been filed and the
identities of all applicants are known, seems a prudent deterrent to
collusion that should have only a minimal and temporary effect on
bidders' flexibility. We wish to make explicit our intention that the
prohibition extend to post-application settlement agreements and
discussions concerning settlement agreements.
51. We do believe, however, that our prohibition on communication
among bidders and formation of agreements among bidders after
applications have been filed may have been excessively broad in that it
includes communications and agreements with bidders who are not bidding
against each other, and so may prevent useful agreements that have no
effect on the competitiveness of bidding. Consequently, we are
modifying our collusion rules, which currently prohibit bidders from
communicating with another after short-form applications have been
filed regarding the substance of their bids or bidding strategies and
which also prohibit bidders from entering into consortium arrangements
or joint bidding agreements of any kind after the deadline for short-
form applications has passed. In order to permit certain bidders to
respond to higher than expected license prices by combining their
resources during an auction, we will now permit bidders who have not
filed Form 175 applications for any of the same licenses to engage in
discussions and enter into bidding consortia or joint bidding
arrangements during the course of an auction. We conclude that where
bidders have not applied for any of the same licenses there is little
risk of anticompetitive conduct and therefore we believe that it is
appropriate to relax our collusion rules to permit bidders in this
context to have great flexibility to increase their competitiveness in
the auction by combining their resources, provided that no change of
control of any applicant takes place.
52. In addition, we now believe that entering into consortium
arrangements or adding equity partners during an auction may have a
useful effect in enabling bidders to acquire the capital necessary to
bid successfully for licenses. We have concluded that formation of
consortia or changes in ownership after the filing of short-form
applications will not necessarily have anticompetitive effects,
provided they do not involve parties that might have bid against each
other and do not result in a change in control of the applicant.
Consequently, we wish to modify our rules regarding amendments to
short-form applications. As a result of our experience in the
nationwide narrowband PCS auction, we believe that it is necessary to
allow applicants to amend their FCC Form 175 applications to make
ownership changes after the filing deadline has passed, provided such
changes do not result in a change in control of the applicant.
Permitting such amendments will provide bidders with flexibility to
seek additional capital after applications have been filed, whole
ensuring that the real party in interest does not change. Accordingly,
we will modify Section 1.2105(c) to permit applicants to amend their
FCC Form 175 applications to reflect ownership changes that do not
result in a change in control of the applicant, provided the parties
have not filed Form 175 applications for any of the same licenses. Such
changes shall not be regarded as major amendments to an application,
provided they do not result in a transfer of control of the license or
the applicant and do not change control of the company.
53. Situations may arise in which an applicant has some common
ownership interest with another bidder. We wish to clarify that, unless
that other entity is expressly identified as an entity with whom the
applicant has an agreement concerning bidding, we will prohibit
communication concerning bidding with that bidder, as described in the
Second Report and Order, even if the other bidder is identified on the
applicant's short form application as having some common ownership
interest with the applicant. We will retain the anticollusion rule as
set forth in the Second Report and Order, with these clarifications.
K. Information Disclosure by Applicants and Licensees
54. Petitions. Two petitions deal with the amount of information
auction participants are required to disclose. GTE requests that the
Commission require applicants to provide full ownership disclosure in
their short form applications.\89\ GTE asserts that by enabling the
Commission and competing applicants to assess the legitimacy of auction
applicants, full disclosure facilitates the award of licenses to
qualified and eligible service providers. According to GTE, full
disclosure also promotes open and informed bidding decision.
---------------------------------------------------------------------------

\89\GTE Petition at 2-4.
---------------------------------------------------------------------------

55. SBC asks that the Commission minimize requirements for
disclosure of information upon transfer of licenses.\90\ SBC states
that the point of transfer disclosures is to ``prevent unjust
enrichment as a result of the methods employed to issue licenses and
permits.''\91\ SBC assserts that rules designed to prevent unjust
enrichment should be solely applicable, if at all, to designated
entities that receive special accommodations, since the risk of unjust
enrichment is high only in auctions where such special accommodations
are provided. SBC asserts that the formation of reasonable and
efficient alliances would be discouraged by the mandate to expose the
details of the alliance to competitors. SBC particularly objects to the
requirement that any management agreements or consulting contracts be
filed. SBC seeks clarification that the disclosure requirements will
apply only to the licensees which either have not begun to offer
service or have only offered service for some minimal period of time.
---------------------------------------------------------------------------

\90\SBC Petition at 6-8.
\91\Id. at 6 (citing 47 U.S.C. Sec. 309(j)(4)(E)).
---------------------------------------------------------------------------

56. Discussion. With respect to ownership disclosure in short-form
applications, in the Second Report and Order we decided to require
applicants to furnish only minimal information in short-form
applications and bidder certifications prior to auctions in order to
reduce administrative burdens and minimize the potential for delay.\92\
Further ownership disclosure requirements, however, were adopted on a
service specific basis in later Reports and Orders.\93\ We believe that
GTE's concerns are fully met by these requirements.
---------------------------------------------------------------------------

\92\Second Report and Order at 165.
\93\See Third Report and Order, Appendix at 13; Fifth Report and
Order at 62.
---------------------------------------------------------------------------

57. As for transfer disclosure requirements, Congress in the Budget
Act required us to develop and test alternative auction designs.\94\ We
noted in the Second Report and Order that in addition to allowing
detection of unjust enrichment, transfer disclosure requirements would
provide data necessary for evaluation on our auction designs.\95\ We
noted that the reporting requirements would allow us to monitor our
compliance with the Congressional directive in Section 309(j)(3)(B) to
ensure that ``new and innovative technologies are readily accessible to
the American people by avoiding excessive concentration of licenses and
by disseminating licenses among a wide variety of applicants.
***.''\96\ The information will be useful in meeting our statutory
obligation to report to Congress on the outcome of the auctions.\97\
The information we acquire from transfer disclosures, including
purchase price and other aspects of the sale contracts and management
agreements, will enable us to determine the ultimate distribution of
licenses and the value of the spectrum for particular uses, and will
permit comparisons between licenses awarded with and without designated
entity provisions. Such analyses require collection of data from all
licensees, not just from designated entities or those who have not
begun to offer service or have only offered service for a short period
of time. As we stated in the Second Report and Order, we do not expect
the transfer disclosure requirements to be burdensome to licensees
because the documents to be submitted will have been prepared for other
purposes in any event. Moreover, parties may request confidential
treatment of competitively sensitive information pursuant to
Secs. 0.457 and 0.459 of our Rules.\98\ Consequently we will retain
transfer disclosure requirements for all transfers of licenses obtained
by competitive bidding.
---------------------------------------------------------------------------

\94\47 U.S.C. 309(j)(3).
\95\Second Report and Order at 214.
\96\Id. at 215.
\97\See Budget Act, 47 U.S.C. Sec. 309(j)(2).
\98\Second Report and Order at 215, citing 47 CFR 0.457, 0.459.
---------------------------------------------------------------------------

L. Application-Processing Rules
58. In the NPRM in this proceeding the Commission stated:
In order to avoid needless duplication, we propose that the
following general filing and processing rules apply to all PCS:
Sections 22.3-22.45 and 22.917(f), and 22.918-22.945, 47 CFR 22.3-
22.45, 22.917(f), and 22.918-22.945. For those PCS applicants who file
on Form 574, we believe that Secs. 90.113-90.159 of our rules, 47 CFR
90.113-90.159, could be used to process those applications with
appropriate modifications.\99\
---------------------------------------------------------------------------

\99\NPRM at 128.
---------------------------------------------------------------------------

59. Petition. AIDE asserts that the Commission acted improperly in
proposing substantive PCS application-processing rules in the NPRM
because, it argues, such rules are outside the scope of this
rulemaking, which is limited to implementation of the competitive
bidding requirements of Sec. 390(j) of the Communications Act.\100\
AIDE argues that the Commission's proposal of application-processing
rules is legally insufficient to constitute a valid notice of proposed
rules, and that some of the rules cited have no immediate applicability
to PCS service. AIDE asserts that in the Second Report and Order the
Commission failed to respond to the merits of the arguments concerning
filing and processing rules in AIDE's comments on the NPRM. AIDE
concludes that the Commission needs to issue a supplemental Notice of
Proposed Rulemaking to adopt license-processing rules for PCS.
---------------------------------------------------------------------------

\100\AIDE Petition at 20-21.
---------------------------------------------------------------------------

60. Discussion. The competitive bidding process is a means of
assigning licenses, and rules and procedures for processing of license
application are an integral and necessary part of that process. The
Commission adopted few filing or processing rules in the Second Report
and Order. Those rules that the Commission did adopt pertaining to the
filing and processing of applications and certifications were clearly
proposed in the NPRM.\101\ The rules to which AIDE refers were adopted
not in the Second Report and Order but in subsequent Orders
establishing auction rules for specific services.\102\ We address
AIDE's petition relating to those rules either in the Orders in which
they were adopted or in reconsiderations of those Orders.\103\
---------------------------------------------------------------------------

\101\See Second Report and Order at 164-168, NPRM at 96-101.
\102\See Third Report and Order at 41, n. 18; Fifth Report and
Order at 83.
\103\See Fifth Report and Order at 83.
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M. Financial Qualifications
61. In the Second Report and Order, the Commission stated that
applicants filing short form applications would be required to certify
that they are financially qualified pursuant to Section 308(b) of the
Communications Act. The applicants would also be required to certify
that they satisfy any financial qualification requirements for the
service in question.\104\
---------------------------------------------------------------------------

\104\Second Report and Order at 166.
---------------------------------------------------------------------------

62. Petition. AIDE states that applying competitive bidding and
payment requirements in addition to existing financial qualification
requirements disadvantages designated entities, who have historically
been constrained by difficulties in capital formation and financing.
AIDE recommends that short-form applications not require and
certification of financial qualification. If an application become
mutually exclusive, according to AIDE, the applicant's payment of its
winning bid would demonstrate that it was financially qualified. If the
application did not become mutually exclusive, then the applicant
should have a short period in which to file any required demonstration
of financial qualifications by amendment.\105\
---------------------------------------------------------------------------

\105\AIDE Petition at 19-20.
---------------------------------------------------------------------------

63. Discussion. We believe that, in order to prevent the delay in
bringing service to the public that might be occasioned by bankruptcies
or by prolonged financial negotiations, it is important to require
licensee to have the financial ability to construct and operate a
system in addition to being able to purchase the license. Consequently
we will continue to require applicants to certify on their short-form
applications that they meet any existing financial qualification
requirements of the services in which licenses are auctioned. We will
not, however, impose additional showings of financial qualification as
part of the auction process.

IV. Designated Entities

A. Introduction
64. Several provisions of the Budget Act address participation by
small businesses, rural telephone companies, and businesses owned by
women and minorities (referred to collectively as ``designated
entities'') in the competitive bidding process and in the provision of
spectrum-based services. Specifically, Section 309(j)(4)(D) of the Act,
provides that, in prescribing competitive bidding regulations, the
Commission shall, inter alia, ensure that small businesses, rural
telephone companies, and businesses owned by members of minority groups
and women are given the opportunity to participate in the provision of
spectrum-based services, and, for such purposes, consider the use of
tax certificates, bidding preferences, and other procedures * * *\106\
---------------------------------------------------------------------------

\106\47 U.S.C. Sec. 309(j)(4)(D).
---------------------------------------------------------------------------

In addition, section 309(j)(3)(B), provides that in establishing
eligibility criteria and bidding methodologies the Commission shall
seek to promote the objectives of ``economic opportunity and
competition and ensur[e] that new and innovative technologies are
readily accessible to the American people by avoiding excessive
concentration of licenses and by disseminating licenses among a wide
variety of applicants, including small businesses, rural telephone
companies, and businesses owned by members of minority groups and
women.'' To promote these objectives, section 309(j)(4)(A) expressly
states that the Commission is required ``to consider * * * alternative
payment schedules and methods of calculation, including lump sums or
guaranteed installment payments, with or without royalty payments, or
other schedules or methods.''\107\
---------------------------------------------------------------------------

\107\See also 47 U.S.C. Sec. 309(j)(4)(C)(ii), requiring the
Commission, when prescribing area designations and bandwidth
assignments, to promote ``economic opportunity for a wide variety of
applicants, including small businesses, rural telephone companies,
and businesses owned by members of minority groups and women'';
section 309(j)(3)(A), establishing the objective to promote ``the
development and rapid deployment of new technologies, products, and
services for the benefit of the public, including those residing in
rural areas, without administrative or judicial delays''; section
309(j)(12)(D)(iv), requiring that the Commission's 1997 report to
Congress evaluate, inter alia, whether and to what extent ``small
businesses, rural telephone companies, and businesses owned by
members of minority groups and women wee able to participate
successfully in the competitive bidding process.''
---------------------------------------------------------------------------

65. In the Second Report and Order we adopted a broad menu of
provisions that the Commission might employ to implement these
statutory provisions. We adopted general provisions and eligibility
rules designed to ensure that small businesses, rural telephone
companies, and businesses owned by members of minority groups and/or
women were afforded the opportunity to participate in both the
competitive bidding process and in the provision of spectrum-based
services. Specifically, we provide that small businesses (including
those owned by women and/or minorities and rural telephone companies)
that are winning bidders for certain blocks of spectrum could pay in
installments over the term of their licenses. We also indicated that
rural telephone companies may be eligible for bidding credits for
licenses obtained in their service areas if they make an additional
infrastructure build-our commitment beyond any existing performance
requirements. We indicated that bidding credits may be available to
designated entities on certain frequency blocks. In addition, we
retained the option of establishing set-aside spectrum in certain
services, in which eligibility to bid may be limited to some or all
designated entities. Finally, we stated that we would consider the use
of tax certificates as a means of creating incentives both for
designated entities to attract capital from non-controlling investors
and to encourage licensees to assign licenses to designated entities in
post-auction transactions.
66. In the Second Report and Order we recognized that the
provisions applicable to particular designated entities would vary
depending on the nature of each individual service. For example, we
retained the discretion to modify our general designated entity
provisions for capital intensive services such as broadband PCS. In
this regard, we stated that we would evaluate on a service-specific
basis the capital requirements and other characteristics of the service
to determine the appropriate provisions. We continue to believe that it
is essential for the Commission to retain flexibility to select, and if
necessary to modify, the general designated entity provisions and
eligibility requirements on a service-specific basis depending on the
capital requirements and construction costs of the particular service.
B. Rural Telephone Company Definition
67. Background. In the Second Report and Order, we adopted a
definition of ``rural telephone company'' that includes independently
owned and operated local exchange carriers that (1) do not serve
communities with more than 10,000 inhabitants in the licensed area, and
(2) do not have more than 50,000 access lines, including all
affiliates.\108\ We stated our belief that a limitation on the size of
eligible rural telephone companies was appropriate because Congress did
not intend for us to provide special treatment to large LECs that
happen to serve small rural communities.\109\
---------------------------------------------------------------------------

\108\47 CFR 1.2110(b)(3).
\109\See Second Report and Order at 282.
---------------------------------------------------------------------------

68. Petitions. Several parties filed petitions for reconsideration
of the Second Report and Order requesting that we modify our standard
definition for rural telephone companies. Petitioners' proposals
include requests that the Commission amend its definition of ``rural
telephone company'' (1) to expressly include municipal- and government-
owned telephone companies within the ``rural telephone company''
definition in accordance with the earlier Senate version of the Budget
Act,\110\ (2) to define ``rural telephone company'' as a local exchange
carrier with annual revenues of less than $100 million or serving no
more than 100,000 access lines;\111\ and (3) to include within the
definition of ``independently owned and operated'' LECs that either
operate 50,000 access lines or less serve communities of 10,000 or
fewer inhabitants.\112\
---------------------------------------------------------------------------

\104\See Anchorage Telephone Utility (ATU) Petition.
\111\See Petitions of The National Telephone Cooperative
Association (NTCA), South Dakota Network, Inc. (SDN) and U.S.
Intelco Networks, Inc. (USIN).
\112\See Petitions of the Rural Cellular Association (RCA) and
SDN.
---------------------------------------------------------------------------

69. In addition, Blooston, Mordkofsky, Jackson & Dickens (Blooston)
and South Dakota Networks, Inc. (SDN) request that the Commission
eliminate the term ``independently owned and operated'' from the
definition of ``rural telephone company.'' According to Blooston, this
restriction is unnecessary to prevent the largest telephone companies
from taking advantage of provisions provided for rural telephone
companies, since this same purpose is already served by the 50,000
access line limit, Blooston argues the Commission should amend its
eligibility rules to indicate that they include the access lines of
affiliates. Similarly, SDN indicates that the Commission should include
``and affiliates'' after ``50,000 or fewer access lines'' in the
current definition. SDN maintains that the current language penalizes
holding companies structured to permit telephone companies to offer
paging and other nonregulated services.
70. The National Telephone Cooperative Association (NTCA) requests
that the Commission amend the definition of rural telephone company to
include any local exchange carrier with annual revenues of less than
$100 million or serving no more than 100,000 access lines. NTCA also
indicates that the term ``independently owned'' should not exclude
small rural telephone companies that are affiliated with each other and
that rural telephone company consortia should be permitted. USIN
similarly advocates a ``rural telephone company'' definition based
annual revenues of less than $100,000,000 or less than 100,000 access
lines. According to USIN a revenue-based test is more accurate than net
worth/net profit test.
71. The Rural Cellular Association (RCA), South Dakota Network,
Inc. (SDN) and NTCA ask that the Commission amend the definition of
rural telephone companies to include any independently owned and
operated local exchange carriers (``LECs'') that either operate 50,000
access lines or less or serve communities of 10,000 or fewer
inhabitants. According to NTCA and RCA, the existing definition
needlessly excludes many small independent telephone companies that
serve rural areas. SDN alternatively requests that we revise the
definition to include carriers with 100,000 or fewer access lines or up
to $100 million in annual revenues.
72. Finally, Anchorage Telephone Utility (ATU) requests that the
Commission modify the definition of rural telephone companies to
include government-owned telephone companies. According to ATU, such a
modification is necessary to achieve congressional intent. ATU notes
that the Senate bill included municipally-owned telephone companies in
its definition of rural telephone companies. ATU's argues that the
Senate Bill mandates special consideration for rural telephone
companies and directed the FCC to grant ``rural program licenses'' to
``qualified'' common carriers and explicitly said that the category of
``qualified'' carriers included all state-owned and municipally-owned
telephone companies.\113\ As evidence Congress' intent to include these
provisions in the enacted version of Budget Act, ATU asserts that the
Conference Report declares that the Senate's ``findings'' are
incorporated by reference.
---------------------------------------------------------------------------

\113\See ATU Petition at 2-3.
---------------------------------------------------------------------------

73. Oppositions and Replies. In its Comment on Petitions for
Reconsideration, BET supports retention of the Commission's existing
generic rural telephone company definition.\114\ BET maintains that
adoption of RCA's proposal to define rural telephone companies as LECs
that have 50,000 access or fewer or serve communities with no more than
10,000 inhabitants will allow large LECs that ``happen to serve rural
areas'' to qualify for designated entity provisions. In response to
BET's Comments, RCA asserts that the ``independently owned and
operated'' requirement for rural telephone company eligibility will
prevent large LECs from qualifying for rural telephone company
provisions. RCA also restates its request for an amendment to the
general rural telephone company definition to include LECs that serve
100,000 access lines or fewer.\115\
---------------------------------------------------------------------------

\114\BET Comments at 2.
\115\RCA Reply at 2.
---------------------------------------------------------------------------

74. In light of the Commission's decision in Fifth Report and Order
in this proceeding, which adopted an alternative rural telephone
company definition, NTCA argues that the Commission should abandon its
generic rural telephone company definition and instead establish rural
telephone company eligibility criteria on a service-specific basis.
Alternatively NTCA proposes that we define rural telephone companies to
include LECs that have annual revenues not in excess of $125 million or
that serve no more than 100,000 access lines.\116\ Tri-County Telephone
Company, Inc. (Tri-County) supports SDN's proposed rural telephone
company definition (50,000 access lines or serves no community with
more than 10,000 inhabitants or alternatively 100,000 access lines or
less).\117\
---------------------------------------------------------------------------

\116\NTCA Reply Comments at 4.
\117\Tri-County Reply at 3.
---------------------------------------------------------------------------

75. Discussion. We are persuaded by petitioner's arguments that the
current generic ``rural telephone company'' definition is overly
restrictive and effectively excludes many independently owned telephone
companies that serve rural areas.\118\ In the Fifth Report and Order we
departed from our generic definition of rural telephone companies in
the context of broadband PCS by adopting a definition that includes any
local exchange carrier having 100,000 or fewer access lines, including
all affiliates.\119\ In adopting this definition of a ``rural telephone
company,'' we sought to achieve the congressional goal of promoting the
rapid deployment of service in rural areas by targeting only those
telephone companies whose service territories are predominantly rural
in nature, and who are thus likely to use their wireline telephone
networks to build infrastructures to serve rural America.\120\ For
purposes of our rules governing broadband PCS licenses, we indicated
our belief that this goal could best be achieved if we defined ``rural
telephone companies'' as those local exchange carriers having 100,000
or fewer access lines, including all affiliates. We concluded that this
definition included virtually all telephone companies whose service
areas are predominantly rural.
---------------------------------------------------------------------------

\118\See RCA Petition at 4-5; USIN Petition at 10; NTCA Petition
at 2.
\119\See Fifth Report and Order at 198.
\120\We also note that the unique technological requirements and
the capital intensive nature of broadband PCS dictated that we adopt
this definition of ``rural telephone company.''
---------------------------------------------------------------------------

76. For the foregoing reasons, we also believe that using the
100,000 access line definition as our standard rural telephone company
definition will better serve our goals of encouraging the provision of
service to rural areas than the definition previously adopted in the
Second Report and Order. Accordingly, we will amend our standard
definition of ``rural telephone company'' to include all local exchange
carriers with 100,000 access lines or fewer, including affiliates. In
general, we believe that this definition will more precisely capture
those carriers that are truly rural in nature, while excluding the
largest telephone carriers that do not face similar capital formation
problems. We believe that this definition will also better achieve
Congress' goal for fostering the development and rapid deployment of
new technologies and services to rural areas by making special measures
available to legitimate rural telephone companies that require such
provisions in order to meaningfully participate in the provision of
service to rural areas without giving such benefits to large companies
that do not require such assistance. Rural telephone companies that
satisfy this definition thus will be eligible for rural telephone
company provisions in each service where such provisions are
established.\121\
---------------------------------------------------------------------------

\121\Such companies also will be eligible for special treatment
under our cellular attribution rules for broadband PCS. See 47 CFR
24.204(d)(2)(ii).
---------------------------------------------------------------------------

77. As indicated above, Blooston, SDN and NTCA request that we
eliminate the phrase ``independently owned and operated'' from the
definition of ``rural telephone company.'' These petitioners assert
that the ``independently owned and operated'' restriction in the rural
telephone company definition was intended to prevent large telephone
companies from taking advantage of rural telephone company benefits,
but that this purpose is served by the access line limit. In this
regard, SDN argues that such language unduly penalizes holding
companies of nonregulated services and entities created by groups of
telephone companies to provide equal access, SS7, and other services.
78. We agree. The new 100,000 access line rural telephone company
definition adopted above includes the access lines of affiliates. Under
the affiliation rules established in the context of broadband PCS, and
adopted below as our generic affiliation rules, the access lines of
holding companies, parent companies or affiliates of rural telephone
companies that are not independently owned will be attributed for
purposes of determining eligibility. This definition will capture most
of the independently owned rural telephone companies, while excluding
carriers affiliated with the largest LECs. In addition, we are
concerned that the requirement that a rural telephone company must be
independently owned would unnecessarily exclude rural telephone
companies that are part of a holding company structure. Therefore we
will delete the ``independently owned and operated'' requirement from
our standard rural telephone company definition.
79. With respect to ATU's request that we amend our definition of
rural telephone company to include municipal and government owned
telephone companies that are owned by governmental authorities, we do
not believe that such a change is warranted. ATU contends that Congress
meant to mandate special consideration not only for telephone carriers
serving rural areas but also for all municipally-owned telephone
companies, even those with wholly or predominantly urban service
areas.\122\ This argument is based on ATU's interpretation of the
Senate bill which preceded the enacted Budget Act. ATU argues that the
Senate bill containing the prototype of a mandate for special
consideration for rural telephone companies directed the FCC to grant
``rural program licenses'' to ``qualified'' common carriers and
explicitly said that the category of ``qualified'' carriers included
all state-owned and municipally-owned telephone companies. ATU further
states that the report of the conference committee that drafted the
Budget Act declares that the Senate's ``findings'' are incorporated by
reference.\123\ ATU also asserts that without the aid of special
assistance it and most other state-owned and municipal telephone
companies will not be able to purchase spectrum licenses at auction
because it is politically infeasible for them to generate and retain
enough surplus revenue to fund such investments, due to popular
aversion to increases in taxes or telephone rates.\124\
---------------------------------------------------------------------------

\122\ATU Petition at 2-3.
\123\Id.
\124\Id. at 4-5.
---------------------------------------------------------------------------

80. As we indicated in the Fifth Report and Order, we are not
persuaded by ATU's arguments.\125\ We can find no specific evidence
that Congress intended the term ``rural telephone companies'' to
include all state or municipally-owned telephone companies. In fact,
the preceding bill contained an explicit mandate for preferential
treatment of government-owned telephone companies that was deleted from
the enacted bill. To the contrary, the fact that an antecedent bill
contained an explicit mandate for preferential treatment of government-
owned telephone companies that was deleted from the enacted bill could
just as easily be interpreted as an indication that Congress rejected
such a rule. We also disagree that state and municipal governments are
without the means to participate successfully in auctions. As we noted
in Fifth Report and Order such governments have substantial
capabilities to raise funds through private financing, bond offerings
and taxation.\126\
---------------------------------------------------------------------------

\125\See Fifth Report and Order at 203.
\126\See Fifth Report and Order at 200. In any event, most
state and municipally owned telephone systems (although not ATU)
will be captured by our new 100,000 access line rural telephone
company definition.
---------------------------------------------------------------------------

C. Rural Telephone Company Consortia
81. Petitions. Telephone and Data Systems, Inc. (TDS) requests that
the Commission relax the eligibility requirements for rural telephone
company bidding consortia by (1) eliminating the 50,000 access line
limit for rural telephone company consortium applicants; (2) allowing
companies with more than 50,000 access lines, directly or through
affiliates, to participate in rural telephone company consortia by
demonstrating that more than 50 percent of their access lines company-
wide (including affiliates) and over 50 percent of those in the
proposed service area serve only communities with 10,000 or fewer
inhabitants and (3) providing that all rural telephone companies in
consortia with 50,000 access lines or less have the right to hold up to
60 percent of the equity in the consortium. SDN and NTCA also argue
that the Commission should allow rural telephone companies to form
consortia, since combining telephone companies would not alter their
rural nature, so long as the rural telephone company retains at least
50.1 percent equity and control.
82. USIN similarly requests that small businesses, including rural
telephone companies, be allowed to qualify for special provisions if
they pool their resources into consortia, provided such consortia are
controlled by designated entities. According to USIN, if such consortia
are not permitted, rural telephone companies and other small businesses
may be foreclosed from participation in the auction process and in the
provision of auctionable services. USIN also indicates that
efficiencies and economies of scale are created by aggregation and thus
special measures should be provided to these entities who may be able
to provide service most efficiently.
83. Discussion. We deny the requests of TDS, SDN,\127\ and NTCA
that we modify the standard definition of rural telephone company to
eliminate or relax the access line limit for rural telephone company
consortia. In the Second Report and Order as a general matter, we
declined to provide exceptions to our designated entity eligibility
criteria for applicants that are consortia of various individual
entities, which in combination fail to qualify as designated
entities.\128\ We found that such combinations, if they deviate from
our standard definitions of designated entities, should not be eligible
for provisions expressly designed for designated entities. This
conclusion was based on our desire to provide economic opportunity to
those entities designated in the statute and to ensure such entities
the opportunity to provide spectrum-based services. We concluded that
establishing exceptions to our definitions for consortia (even those
wholly comprised of otherwise qualified designated entities) would
undermine this objective by diluting the economic opportunity for
individual qualified designated entities. We also found that allowing
applicants to be formed from a combination of eligible and ineligible
entities would invite attempts to abuse the designated entity
provisions by those not entitled to them.
---------------------------------------------------------------------------

\127\SDN argues that the Commission should allow rural telephone
companies to form consortia among themselves, since combining
telephone companies does not alter their rural nature. SDN also
argues that consortia with investors should be permitted so long as
the rural telephone company retains at least 50.1 percent equity and
control. SDN Petition at 20-23.
\128\See Second Report and Order at 286.
---------------------------------------------------------------------------

84. However, in the Second Report and Order we noted that we may
determine on a service-specific basis to allow a designated entity
consortium to receive other benefits based on equity and operational
participation in the consortium by one or more designated entities. We
retained the flexibility to enable designated entity consortia to
qualify for special provisions particularly where the capital costs of
a particular service are high and the formation of consortia is thus
essential to foster investment in designated entity ventures and to
enable such entities to compete in the provision of such service. In
this regard, in the Fifth Report and Order we allowed consortia
comprised of small businesses to qualify for all of the measures
applicable to individual small businesses provided each member of the
consortium individually satisfies the definition of a small business.
We found that given the ``exceptionally large capital requirements''
associated with broadband PCS, allowing small businesses to pool their
resources in this manner was necessary to help them overcome capital
formation problems and thereby ensure their opportunity to participate
in auctions and to become strong broadband PCS competitors.
85. As a general matter, we will continue to determine whether to
permit designated entities to receive benefits based on their
participation in consortia on a service-specific basis, depending on
the capital requirements and other characteristics of the particular
service. We modify the Second Report and Order, however, to provide
that consortia may be permitted to qualify for any designated entity
provisions (where each member individually meets the eligibility
requirements) on a service-specific basis, where the capital
requirements of the service are high. Where, as in broadband PCS, we
will find that the capital requirements necessitate allowing designated
entities to pool their resources to help them overcome capital
formation problems and thereby ensure their opportunity to participate
in auctions and in the provision of service, we may adopt rules
allowing such consortia to qualify for designated entity provisions.
D. Affiliation Rules
86. Petitions. Blooston and NTCA request that the Commission
clarify the meaning of ``affiliate'' for purposes of access line
aggregation. According to Blooston, passive investments by a rural
telephone holding company in other telephone companies should not
preclude eligibility for rural telephone company status, so long as
there is no common control between the rural telephone company and the
other carrier. Blooston reasons that the common control definition is
used in the auction rules for small businesses' affiliates, has been
used by the Commission when defining connecting carriers, and is
generally used by the financial community and the Securities and
Exchange Commission. Finally, Blooston requests that the Commission
amend its designated entity provisions to allow rural telephone
companies to combine into consortia and partner with investors without
losing designated entity status so long as the majority equity control
resides with members who are rural telephone companies. NTCA similarly
requests that the term ``affiliates'' be clarified to indicate what
organizational structures are permitted.
87. Discussion. In response to the requests of the NTCA and
Blooston that we clarify the meaning of the term affiliate to indicate
the types of organizational structures that will be included, we amend
the Second Report and Order to establish as our standard affiliation
rules the same affiliation rules adopted by the Commission in the Fifth
Report and Order.\129\ Blooston specifically requests that we clarify
the meaning of ``affiliate'' so that passive investments by a rural
telephone company in other rural telephone companies do not preclude
designated entity status if there is no common control. As described
more fully below, under our affiliation rules a passive interest in
another telephone company, which does not constitute control of that
company would not be considered an affiliation for purposes of access
line aggregation.
---------------------------------------------------------------------------

\129\See Fifth Report and Order at 201-217.
---------------------------------------------------------------------------

88. In the Second Report and Order, we referenced the SBA's
affiliation rules for purposes of defining generally whether an entity
qualifies as a small business and gave examples of how the affiliation
rules would be applied. In the Fifth Report and Order we expanded on
the SBA's affiliation rules in establishing detailed affiliation
standards for broadband PCS to be used in the context of determining
designated entity eligibility where our criteria are based on the size
of the entity seeking special treatment and require applicants to
include ``affiliates'' when calculating their eligibility. These
affiliation requirements are intended to prevent entities that do not
meet these size standards for receiving benefits targeted to smaller
entities.\130\ We believe that these rules are appropriate for
determining affiliations generally, and therefore we will incorporate
these standards into our generic auction rules for purposes of
determining all size-based eligibility requirements. We summarize these
standards below.
---------------------------------------------------------------------------

\130\See, e.g., Second Report and Order at 272.
---------------------------------------------------------------------------

89. Where we adopt sized-based eligibility rules and provide that
such eligibility determinations shall include the applicant and all its
``affiliates,'' the following rules shall govern determinations
regarding affiliation. Apart from determining affiliation between the
applicant itself and outside entities, the need to determine
affiliation arises where an investor has an attributable interest in a
designated entity.\131\ In this context it is necessary for the
Commission to examine whether such investor has a relationship with
other persons or outside entities that rise to the level of an
affiliation with the applicant, and if so, whether the affiliate's
assets, revenues, net worth, number of access lines, or other
applicable financial thresholds, when aggregated with the applicant's,
exceed the Commission's size eligibility thresholds.
---------------------------------------------------------------------------

\131\In the context of broadband PCS, we stated that, generally,
investors owning more than 25 percent of the applicant's passive
equity would be considered to have ``attributable'' interests. See
Fifth Report and Order at 158. With regard to IVDS, we used the SBA
standard to determine attributable interests, i.e., control.
---------------------------------------------------------------------------

90. General Principles of Affiliation. An affiliation under the SBA
rules would arise, first, from ``control'' of an entity or the ``power
to control it.'' Thus, under the SBA rules, entities are affiliates of
each other when either directly or indirectly (i) one concern controls
or has the power to control the other, or (ii) a third party or parties
controls or has the power to control both.\132\ In determining control,
the SBA's rules provide generally that every business concern is
considered to have one or more parties who directly or indirectly
control or have the power to control it. The rules, in addition,
provide specific examples of where control resides under various
scenarios, such as through stock ownership or occupancy of director,
officer or management positions. The rules also articulate general
principles of control, and note, for example, that control may be
affirmative or negative and that it is immaterial whether control is
exercised so long as the power to control exists.\133\ Second, an
affiliation, under SBA rules, may also arise out of an ``identity of
interest'' between or among parties.\134\ We adopted these same general
provisions as our affiliation rules for broadband PCS and will also
incorporate them into our general affiliation rules.
---------------------------------------------------------------------------

\132\13 CFR Sec. 121.401(a)(2) (i), (ii).
\133\Id. Sec. 121.401(c)(1).
\134\Id. Sec. 121.401(a)(2)(iii), (d).
---------------------------------------------------------------------------

91. In adopting these affiliation rules, we emphasize that these
rules will not be applied in a manner that defeats the objectives of
our service specific attribution rules. For example, in the context of
broadband PCS, our attribution rules expressly permit applicants to
disregard the gross revenues, total assets and net worth of certain
passive investors, provided that an eligible control group has de facto
and de jure control of the applicant.\135\ Our attribution rules are
designed to preserve control of the applicant by eligible entities, yet
allow investment in the applicant by entities that do not meet the size
restrictions in our rules. Therefore, so long as the requirements of
our attribution rules are met, the affiliation rules will not be used
to defeat the underlying policy objectives of allowing such passive
investors. More specifically, if a control group has de facto and de
jure control of the applicant, we shall not construe the affiliation
rules in a manner that causes the interests of passive investors to be
attributed to the applicant.
---------------------------------------------------------------------------

\135\See Fifth Report and Order at 205.
---------------------------------------------------------------------------

92. Applying these SBA affiliation rules, an affiliation would
arise, for example, where an entity with an attributable interest in an
applicant is under the control of another entity. An affiliation would
also arise where an entity with an attributable interest in an
applicant controls, or has the power to control, another entity. For
example, if an attributable investor in an applicant is also a
shareholder in a large Corporation X, when should Corporation X be
deemed an affiliate of the applicant as a result of the shareholder's
ownership interest in both entities? Under the SBA rules and the rules
we adopt here, Corporation X would be deemed an affiliate of the
applicant if the shareholder controlled or had the power to control
Corporation X, in which case, Corporation X's gross revenues must be
included in determining the applicant's gross revenues.\136\
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\136\See Fifth Report and Order at 206.
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93. For purposes of determining control, ownership interests will
be calculated on a fully-diluted basis. Thus, for example, stock
options, convertible debentures, and agreements to merge (including
agreements in principle) will generally be considered to have a present
effect on the power to control or own an interest in either an outside
entity or the PCS applicant or licensee. We will treat such options,
debentures, and agreements generally as though the rights held
thereunder had been exercised.\137\ However, an affiliate cannot use
such options and debentures to appear to terminate its control over or
relationship with another concern before it actually does so.\138\
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\137\See 13 CFR 121.401(f). SBA's rules provide the following
examples to guide the application of this provision: Example 1. If
company ``A'' holds an option to purchase a controlling interest in
company ``B,'' the situation is treated as though company ``A'' had
exercised its rights and had become owner of a controlling interest
in company ``B.'' The [annual revenues] of both concerns must be
taken into account in determining size. Example 2. If company ``A''
has entered into an agreement to merge with company ``B'' in the
future, the situation is treated as though the merger has taken
place. [A and B are affiliates of each other].
\138\Id. SBA's rules provide this example: If large company
``A'' holds 70 percent (70 of 100 outstanding shares) of the voting
stock of company ``B'' and gives a third party an option to purchase
66 of the 70 shares owned by A, company ``B'' will be deemed to be
an affiliate of company ``A'' until the third party actually
exercises its option to purchase such shares. In order to prevent
large company ``A'' from circumventing the intent of the regulation
which [gives] present effect to stock options, the option is not
considered to have present effect in this case.
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94. Voting and Other Trusts. In a similar vein, we also borrow from
the SBA's rules and our own rules in other services to find affiliation
under certain voting trusts in order to prevent a circumvention of
eligibility rules. The SBA's rules provide that a voting trust, or
similar agreement, cannot be used to separate voting power from
beneficial ownership of voting stock for the purpose of shifting
control of or the power to control an outside concern, if the primary
purpose of the trust is to meet size eligibility rules.\139\ Similarly,
under the Commission's broadcast multiple ownership rules, stock
interests held in trust may be attributed to any person who holds or
shares the power to vote such stock, has the sole power to sell such
stock, has the right to revoke the trust at will or to replace the
trustee at will.\140\ Also, under the broadcast rules, if a trustee has
a familial, personal or extra-trust business relationship to the
grantor or the beneficiary of a trust, the stock interests held in
trust will be considered assets of the grantor or beneficiary, as
appropriate.\141\ Because we believe the broadcast rules provide more
definitive guidance in this particular area, we shall use them as a
model for the general affiliation rules adopted here. Thus, for
example, if an investor with an attributable interest in an applicant
holds a beneficial interest in stock of another firm that amounts to a
controlling interest in that other firm, depending on the identity of
the trustee, the other firm may be considered an affiliate and its
assets and gross revenues may be attributed to the applicant.
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\139\13 CFR 121.401(g).
\140\See 47 CFR 73.3555 note 2(e).
\141\Id.
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95. Officers, Directors and Key Employees. Under the SBA's
affiliation rules, which we adopt as our generic approach, affiliations
also generally arise where persons serve as the officers, directors or
key employees of another concern and they represent a majority or
controlling element of that other concern's board of directors and/or
management of the outside entity.\142\ Thus, if a person with an
attributable interest in an applicant, through his or her other key
employment positions or positions on the board of another firm,
controls that other firm, then the other firm will be considered an
affiliate of the applicant. Such affiliations may or may not result in
the applicant's exceeding our size limitations. As this rule reflects,
for purposes of attributing the financial position of an outside entity
in this context, officers and directors of an outside concern are not
foreclosed entirely from holding attributable or non-attributable
interests in an applicant. Whether or not such persons control the
outside entity, we also do not want to prohibit these persons, who may
be experienced in the telecommunications, finance, or communications
and equipment industries, from assisting start-up companies by serving
as officers or directors of the applicant. Thus, if such persons
serving as officers or directors of the applicant do not control the
applicant or otherwise have an attributable interest in the applicant,
their outside affiliations (even if controlling) will not be considered
at all for purposes of determining the applicant's eligibility under
our rules.\143\
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\142\See 13 CFR 121.401(h). A key employee is an employee who,
because of his/her position in the concern, has a critical influence
in or substantive control over the operations or management of the
concern. 13 CFR 121.405.
\143\SBA's size standard affiliation rules also provide that
affiliations can arise in a variety of other scenarios, such as
where one concern is dependent upon another for contracts and
business, where firms share joint facilities, or have joint venture
or franchise license agreements. To the extent we believe these
rules may have general applicability we shall codify them in our
affiliate rules. We caution parties that issues relating to de facto
control of the applicant (or parties with attributable interests in
the applicant) could also arise under arrangements not expressly
codified in the rules.
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96. Affiliation Through Identity of Interest: Family and Spousal
Relationships. Consistent with the SBA's rules, an affiliation may
arise not only through control, but out of an ``identity of interest''
between or among parties.\144\ For example, affiliation can arise
between or among members of the same family or persons with common
investments in more than one concern. In determining who controls or
has the power to control an entity , persons with an identity of
interest may be treated as though they were one person.\145\ For
example, if two shareholders in Corporation X are both attributable
shareholders in an applicant, to the extent that together they have the
power to control Corporation X, Corporation X may be deemed an
affiliate of the applicant.
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\144\See 13 CFR 121.401(a)(2)(iii).
\145\Id. Sec. 121.401(d).
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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A94-21182. Public record. Not legal advice.